June 12 (Bloomberg) -- The euro region’s debt crisis has increased risks for emerging markets from Thailand to Turkey that also face domestic constraints, according to the World Bank, which cut its outlook for 2013 global growth to 3 percent.
The Washington-based lender predicts the world’s economy will expand 2.5 percent this year, the same as a January forecast, after gains earlier this year were sapped by renewed market volatility over Greece and Spain. Next year’s prediction is down 0.1 percentage point from January.
“In the immediate term, tensions emanating from the euro area are the most serious potential risk for developing countries,” the World Bank said in its twice-yearly report. In the 17-country euro region, “bond yields on the debt of several countries have reached levels that, in the past, have been associated with” international rescue packages.
Spain last week became the fourth nation sharing the euro to seek a bailout since the start of the debt crisis more than two years ago, prompting a decline in Italian bonds and equities yesterday on concern the nation may be the next to succumb. No region in the world would be spared if the situation in Europe were to sharply deteriorate, according to the World Bank, which urged emerging markets to build cushions for tougher times.
“The developing countries in the case of a financial crisis will need all the ammunition that they have available to address that,” Hans Timmer, the director of the Development Prospects Group at the bank, told reporters. “One of our concerns is that, at the moment, there are much fewer buffers, smaller buffers in developing countries than in 2007.”
They already feel the pain, according to the report, which says gross capital flows to developing countries shrank 44 percent in May from the month before. The quantity of syndicated bank loans to Russia organized and led by European banks fell by 50 percent in the six months through March 2012, the World Bank said.
India last week outlined projects including new ports and road to support an economy expanding at the weakest pace in nearly a decade. China unveiled its first reduction in borrowing costs in more than three years.
Capital outflows and increased risk aversion have also led to currency depreciation in many emerging markets and a drop in commodity prices, according to the report.
“Even if the current phase of tensions passes, the external environment for developing countries is likely to remain volatile and challenging,” the World Bank said. “Loose monetary policies, and, as yet, unresolved fiscal and banking-sector problems in high-income countries are likely to keep international capital flows and business confidence volatile.”
The euro area is projected to contract 0.3 percent this year, unchanged from the World Bank’s January forecast. The euro area next year may grow 0.7 percent from a previous estimate of 1.1 percent.
Developing economies are also facing domestic difficulties. After leading the world out of recession over the past two years, about 60 percent of them are operating close or above their economic potential, Timmer said.
That “suggests that they will not be able to provide as much an impetus to global growth as before,” the bank said.
Inflation is above long-term average in nations from Argentina to Thailand and monetary policy remains “very loose” in countries including China and Indonesia, according to the report.
For a lot of emerging countries, the focus should be on increasing their productivity and their financial strength to face potential hardship, Timmer said.
“If you look at where developing countries are now relative to their production potential, there’s no need for short-term stimulus,” he said in an interview.
The World Bank expects growth in developing economies to reach 5.3 percent in 2012 and 5.9 percent next year, cutting forecasts by 0.1 percentage point for both years.
That compares with an unchanged 1.4 percent this year in advanced counterparts, as well as 1.9 percent next year, less than the 2 percent predicted in January. The U.S. is seen growing 2.1 percent this year, from 2.2 percent in January, and 2.4 percent next year.
China may grow 8.2 percent this year and 8.6 percent next year, compared with January estimates of 8.4 percent and 8.3 percent.
India’s expected expansion of 6.6 percent this year is more than the 6.5 percent expected five months ago, though the bank now sees growth of 6.9 percent next year compared with 7.7 percent in January.
The Bank also updated a study on the impact on the rest of the world of a more severe European crisis. It estimates that world growth would be 4.5 percent lower than currently expected next year if two large countries, accounting for 30 percent of the euro region’s economy, faced a credit freeze.
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